Wednesday, July 27, 2011

Creative Destruction of Jobs Makes Us Richer

"In 1790, farmers were 90 percent, out of a population of nearly 3 million, of the U.S. labor force. By 1900, only about 41 percent of our labor force was employed in agriculture. By 2008, fewer than 3 percent of Americans were employed in agriculture (MP: see chart above, farm jobs as a share of the labor force is now below 2%). Through labor-saving technological advances and machinery, our farmers are the world's most productive. As a result, Americans are better off.

If 90 percent of Americans still had been farmers in 1900, where in the world would we have gotten workers to produce all those goods that were not even heard of in 1790, such as telephones, steamships and oil wells? We need not go back that far. If there hadn't been the kind of labor-saving technical innovation we've had since the 1950s -- in the auto, construction, telephone industries and many others -- where in the world would we have gotten workers to produce things that weren't heard of in the '50s, such as desktop computers, cellphones, HDTVs, digital cameras, MRI machines, pharmaceuticals and myriad other goods and services?

What technological innovation does is reduce the value of some jobs, raise the value of others and create many more jobs. Some workers are made better off through greater employment opportunities. Others are made worse off by having to accept less attractive employment opportunities, an adjustment process that can be painful. Since technological progress makes goods and services cheaper, and of higher quality, to stand in its way, in the name of saving jobs, will make us a poorer nation. What we're witnessing in our economy is what economic historian Joseph Schumpeter termed "creative destruction," the process in which something new replaces something older."

27 Comments:

While there is at least some evidence that Obama and Progressives understand this phenomenon, what kind of hubris is required to believe a few experts can control it by analyzing data?

Which inspires a related question: Countries have tried redistribution throughout history. If the multiplier on spending is so significant and the idea of 'aggregate demand' is correct, why don't those countries outperform freer markets?

now if we could just get the Luddites calming that we need manufacturing jobs to see that they are just like the folks lamenting the loss of the family farm in 1820, we could get on to the next stage of wealth creation.

Innovation, the countries that do manage economic development in fact do outperform freer markets.

Take the US, the world's leading economy. Lots of agriculture in 1790. The reason for that is the world's leading industrial power at the time, Great Britain, forbid the US from blocking via tariffs British industrial products. Why? Since they were the world leader they knew that nobody could compete with them. So if anybody wanted to buy an industrial product they would naturally buy the superior British one.

And they thought that was for the best. Adam Smith said the colonies need to pursue their comparative advantage. Trap, fish, farm. Ship that stuff to Britain and let Britain make industrial products, since they are already so good at it.

Following independence the US was able to resist British importation and ignore the advice of Adam Smith. They followed the advice of Alexandar Hamilton, who pioneered an idea now called "infant industry protection." Impose massive tariffs on foreign imports. That allows local development. Without it, how can new industries compete?

The US did exactly that. Britain's remaining colonies did not have the strength to resist their free market demands, so they languished. US economic development skyrocketed. Tariffs remained especially high in the US during the post Civil War years, which once again corresponded with massive US economic development.

Now that the US finds itself in the position Britain was back in the 19th century the US is doing exactly what Britain did. Forbid others from engaging in infant industry protection.

The two economies in the world able to resist the US are China and India. They continue to block US products and have great growth. Those that don't are in Latin America, Africa, and Haiti. The poorest places in the world.

Take a look at the economies that pulled themselves out of poverty. South Korea, Japan, Germany. Or going back a bit look at the US or Britain. A lot of infant industry protection and government involvement in industry. The very prescriptions now denied to poor countries today.

This is explained in a couple of good books by Cambridge economist Ha-Joon Chang. See "Kicking Away the Ladder" or "Bad Samaritans."

"They followed the advice of Alexandar Hamilton, who pioneered an idea now called "infant industry protection." Impose massive tariffs on foreign imports. That allows local development. Without it, how can new industries compete?"

this is not true at all.

new industries emerge all the time without protectionism.

look at the huge rise of taiwan semiconductors or us pharma or entertainment or banking.

further, such "infants" still face competition from others in the country. the national border is just an arbitrary line from a competitiveness standpoint.

the industries we protect airlines, steel, etc are the ones that fail all the time.

this whole "protect the infants" thing is ridiculous. why would we want a bunch of companies that cannot compete at a global level?

if they cannot, they should not be companies.

guys like hamilton also leave out the high costs of doing this. there is always a deadweight loss from protectionism. consumers lose more than producers gain. this hurts wealth creation, other businesses, and overall well being.

far from being a recipe for success, this neo-mercantilism is just political connected industries lobbying to pick the pockets of their customers, same as it always was.

it was bad policy then, and it's bad policy now. you can grow despite it if you have the wind of an industrial revolution at your back, but trying it one industrialized will prove just how badly it works.

"Adam Smith said the colonies need to pursue their comparative advantage."

At the time that Smith was writing this the colonies were part of of the greater British Empire and the "trade" he was talking about was trade within that Empire. It's important to understand the context.

"Impose massive tariffs on foreign imports. That allows local development. Without it, how can new industries compete?"

Really? How much "local development" has actually taken place in China? Most of their development has come from the investment in plants and facilities by foreign firms. And what about "innovation"? Name a single product that was conceived, engineered, produced and marketed in China that the rest of the world wants to buy.

"The two economies in the world able to resist the US are China and India. They continue to block US products and have great growth."

Resist? In what way. They have "great growth" relative to the pathetic economic base at which they started.

10% growth in china would be 1.5% growth here in terms of PPP dollars. if we grow 2% and they grow 10, our nominal income goes up more than theirs.

it's easy to grow when you are dirt poor.

china has per capita GDP lower than jamaica and not even half the level of mexico. half as rich as mexico is not much of an achievement.

their current % growth is not a function of their great policies. it's a function of how terrible they had been before.

if you are 200 pounds and sit on your couch eating frosting out of the can all day, even getting 20 minutes of cardio a day will help. in % terms, your improvement will be greater than an Olympic marathoner. it doesn't make you fit or mean that you are gaining more than they are.

"... the countries that do manage economic development in fact do outperform freer markets."

Obama has been a busy little beaver picking winners and losers in the energy sector. The result has been massive fraud, net negative job losses, staggering inefficiencies, and waste on a galactic scale.

Even if government had the ability to competently "manage" a complex economy, it always gets corrupted by the political process. This has never been more true than today under the corrupt Obama administration.

"Obama has been a busy little beaver picking winners and losers in the energy sector. The result has been massive fraud, net negative job losses, staggering inefficiencies, and waste on a galactic scale"...

• nearly $12 billion in tax and royalty revenues to state and federal treasuries

• US oil production of more than 400,000 barrels of oil per day (bd) (equivalent to approximately 150 million barrels in the full year)

• reducing the amount the United States sends to foreign governments for imported oil by around $15 billion

The employment effects would not be limited to the Gulf states. One-third of those jobs would be generated outside the Gulf region in such states as California, Florida, Illinois, Georgia, and Pennsylvania...

look at the huge rise of taiwan semiconductors or us pharma or entertainment or banking.

Taiwan is well known to have been a highly interventionist government. US pharma depends crucially on government backed R&D.

this whole "protect the infants" thing is ridiculous. why would we want a bunch of companies that cannot compete at a global level?

Of course we want companies that can compete globally, but you can't expect a country like Haiti to immediately produce a car that is as good as a Toyota. It takes time. It takes protection. That's what S Korea did. They just wouldn't permit the purchase of non Korean products except when specifically permitted by the government. They went from being a country like Haiti to being a country that in fact produces high quality products, like cars and electronics.

guys like hamilton also leave out the high costs of doing this. there is always a deadweight loss from protectionism. consumers lose more than producers gain.

That's speculative and unfalsifiable. But here's what we do know. Today's leading economic powers used infant industry protection and government intervention extensively. The economies that lead growth today do the same. The ones that don't do it, and haven't been doing it for decades, include Haiti, Latin America, just about all countries in Africa, and other locations of misery. You can say that maybe China would have had even greater than 8-9% growth year over year over the last 30 years if they hadn't had government intervention and I can't disprove speculation. But why believe that other than considering thought experiaments that show free trade is great? It may make sense in thought experiments, but it just doesn't seem to coincide with the world in my view.

Some government direction, whether incentives or protections of various industries, does not require central planning down to minute details. S Korea and the United States had government involvement, but they weren't Communist.

Though let me say that Cuba has been subjected to decades of terror unprecedented in the world. That's tough to overcome. And the Soviet Union did industrialize. It was absolutely brutal and hideous, but it did work, at a cost of the lives of millions. Actually S Korea was also fascist, corrupt, and terrible. But it did work if the goal was economic development. So you can learn from history without claiming that everything the Soviet Union did or S Korea did was right.

Really? How much "local development" has actually taken place in China?

Over the last 30 years China has lead the world in economic growth. It has lifted 300 million people out of poverty. This may be the most dramatic reduction in poverty the world has ever known. You have to admit they must be doing something right.

Resist? In what way.

China has managed to block speculative capital flows and also impose restrictions on importation of goods. I happen to work with Chinese people. When they visit my company in America they leave with tons of products made in China that they buy at Wal-Mart. These are much more expensive in China because the Chinese government wants to encourage a trade surplus. This permits them to acquire US currency, which protects them from the IMF and World Bank, and also spurs demand that drives growth. These are government imposed measures that have produced astonishing growth.

Small, weaker countries try to do the same things, but the US threatens them with trade sanctions if they do. So they cave. This is Haiti, Africa, Latin America, etc. They have no choice but to permit short term speculative capital that ultimately harm them.

Morganvich says their growth is terrible. Lower than Jamaica and half of Mexico. According to Gapminder in terms of PPP they exceed Jamaica. In 2009 Mexico was $11,250. China was $7,226. Back up 30 years. Mexico was $8735. China was $915. Mexico was almost 10x what China was. Today China is barely behind. Jamaica was $6428. Jamaic was 7x China. Today China exceeds them. If that makes China terrible, what would good look like?

"Taiwan is well known to have been a highly interventionist government. US pharma depends crucially on government backed R&D."

jon-

BS.

Taiwan never shielded its semi industry. they made it on their own.

US pharma was founded that was as well. it's only revently that they have become big sucks of federal money, and even then, only the big guys who are doing poorly. the vibrant part of the market is the venture and IPO funded biotech.

you are just making claims here that are flat out wrong.

the world bank numbers (much more reliable than the IMF) for 2009-10 at PPP are:

US 47,084mexico 15224jamaica 7811china 7536

back up 10 years and mexico grew about $7000

china grew $6600.

per capita, their growth was at least equal to china in nominal terms.

sure, china has higher %, but that's just because their base is so low.

their current per capita GDP is less than the growth in mexico over the last decade and less that the growth in the US in that period as well.

would you rater get a 10% raise on $10k salary or a 3% raise on $65,000?

that's pretty much precisely the US china comparison over the last decade.

I am not worried 'bout China's GDP overtaking ours--in theory, the richer they are, the better off we will be from trade etc.

They will overtake us shortly.

I might be worried about China's rapidly rising influence all through Asia, but especially the East. They have already eclipsed us in this area, and their influence will continue to grow.

While China is rapidly cutting trade deals, we are steaming around in circles with aircraft carriers, bristling with offensive weaponery--right off China's coast.

Funny thing--those carriers don't win deals, and offend many people. Oh gee, you would like Chinese warships offshore from Houston, conducting war games and missile tests?

The China fascist-mercantilist model is not what I like--but they are growing rapidly, and the 750,000-member CPP owns a majority stake in every publicly traded Chinese company. It is and may become an even-larger juggernaut.

If you want to see trade deals, take it up with your boyfriend and the Democrats. There are 3 that are ready to go, 1 that has been ready for years, but held up by Obama and co. on behalf of the union thugs who bankroll the Democrat party.

Morganvich, I didn't actually say Taiwan shielded it's semi industry. I said they were interventionist. So Taiwan had a large number of state owned enterprises. Their government appoints the boards to companies that they have a stake in. The government has lots of stock in a lot of companies. Whether they shielded industries I don't know.

I think it's pretty standard to evaluate economies based on growth, not on their present level. Yeah, China is small next to us. But they used to be VERY small next to us. Lots of other countries are extremely small and lack the government management of globalization, and these economies don't grow. So take Haiti for instance. The poorest country in our hemisphere. They have tiny tariffs, no government intervention. We learned from Wikileaks that their effort to push the minimum wage up to 61 cents/hr was crushed by Washington, which would grant them only 31. They are pretty much run by the World Bank, which means policies consistent with the Washington Consensus. When they democratically elected a President (Aristide) that promised leftist economic policies he was just ousted in a coup and replaced with his defeated opponent, Marc Bazin, a former World Bank official.

So I think we should try and learn from countries that make progress. China is small economically relative to us, but manages economic activity via government and at least grows. Haiti is likewise small but in fact implements neoliberal economic policies, meaning low tariffs, limited government regulation and bureaucracy, fee flow for speculative capital, a free hand for foreign investors (relative to China). They don't grow. So how is it possible to conclude that the freer economies outperform the interventionist ones?